Navient (NAVI), a student loan servicing firm, is fairly new to the S&P 500 since going public last year. The company's stock price has declined by almost 45% in the past year. In doing so, the price struggle has created a dividend yield of over 5%. A high-yield financial stock outside of REITs is rare in today's market. In the consumer finance space, Navient holds a superior yield over other S&P 500 consumer finance companies. Is the company's stock struggle indicative of problems sustaining the company's dividend?
Over the past four quarters, Navient has paid out 34% of its earnings in the form of dividends. On a quarterly basis, Navient's payout ratio has ranged from 28% to 40% over the past year. While this seems sufficient, payout ratios among financing entities rarely exceed 40%. For Navient, the payout ratio is in a healthy-enough range to maintain the dividend.
Investors should also look at forward earnings when weighing a company's dividend sustainability. For Navient, analysts are projecting 7% to 11% earnings growth over the next two years. If the dividend remains and the earnings meet expectations, Navient's payout ratio will fall to 32% for 2016. Investors should note that Navient has come within least 5% of earnings expectations since going public.
One concern investors should have regarding Navient's ability to maintain its dividend is the company's leverage. Typically, leverage is not a part of the dividend discussion, but with a debt to equity ratio of 34:1, it merits discussion. Given that interest rates are rising, Navient's borrowing costs are going to rise, which may put pressure on the company to deleverage. If Navient were to actively deleverage (similar to what big banks did following the financial crisis), the dividend will certainly need to be cut. Investors should eye the company's leverage in future earnings reports as well as any dramatic moves in the interest rate environment.
Overall, I believe Navient's dividend is sustainable. The company's core of student loan servicing is less prone to recessions than mortgages or unsubsidized consumer loans. If the company were structured similar to Bank of America (BAC), I would be skeptical. Navient would make a good diversification stock for an income investor seeking a non-real estate finance company. (Bank of America is part of TheStreet's Action Alerts PLUS portfolio.)